Losing Count

 Over the last decade or so I really have lost count of the number of times I’ve had to tell somebody that the business case we are discussing really isn’t as simple as they’re making it out to be. Part of that is just because I spent most of the last 12 years teaching business strategy and policy to undergraduate business students, but in fairness most people like problems with simple solutions, and are therefore prone to looking for simple solutions to every problem. But if running a business was really as simple as it looks you wouldn’t need people to manage them, and my students and I would all be out of a job…

Consider, if you will, a case that came up last week about a customer who ordered a bicycle online for pickup at a local dealership. Unfortunately, the bike in question has a load limit of 300 pounds, and when the customer turned up at the story to collect his purchase it became apparent that he was somewhat heavier than that. The article in the Global News doesn’t specify the customer’s exact weight, and he wasn’t willing to disclose it to the interviewer, but it was obvious enough that the owner of the bike shop refused to let the customer leave with the bicycle. This went over about as well as you would expect…

The shop’s owner argued that if the customer got on the bike at his current weight there was a non-zero chance that the frame would collapse, causing possibly serious injury. This is true, by the way – and if such a frame failure occurred while the customer was riding in traffic there is a real possibility that he could be killed in the resulting accident. The owner explains that not only was he unwilling to risk the legal exposure, but he felt that he had an ethical responsibility not to allow someone to be injured or killed by something he sold them...

The customer, in turn, argued that he knew better than to use his purchase in an unsafe manner, that he would wait until he had lost enough weight to get below the 300 pound limit before trying to ride his new purchase, and in any case it was a legal purchase and nobody else’s business what he did with it. The owner offered to store the bike for him until he reached the weight limit, refund his money so the customer could buy something else, or just release the bike if the customer would sign a waiver promising not to sue in the event of a frame failure, but the customer said he didn’t think he should have to sign a waiver just to pick up something he had already paid for…

Now, one could reasonably argue that a business can’t be held responsible for the unsafe usage of its products, no matter what those products happen to be. If a hardware store sells someone a chainsaw, and the customer manages to injure himself (fatally or otherwise) while trying to learn how to juggle chainsaws, no one is going to blame the owner of the store. The problem here is that riding a bicycle isn’t an obvious misuse of the product, and even if the bike shop (or the manufacturer) can claim to have pointed out the weight limit and the risks involved in exceeding it, there’s still a possibility that a jury might find against them…

I don’t have a simple answer to this question, either; as I noted at the top of this post, I’m not sure there is one. The underlying problem is that the standard in a civil trial isn’t “beyond a reasonable doubt,” it’s “what a reasonably prudent person would expect.” You also don’t have to convince all twelve members of the jury that you are correct; you only need 50% of them plus one. As tempting as it might be to just say the customer was warned about the hazards of the situation, and he can make up his own mind about safety, I think it is understandable as to why the owner of the bike shop is reluctant to roll those dice without at least a signed statement acknowledging that the customer was, in fact, warned about those hazards. Especially considering that nothing in this story suggests that the customer actually is reasonable or prudent. But even leaving the legal, ethical, or moral implications out of it, how does one resolve this problem from a practical standpoint?

Read the Room

I’m reluctant to use this title for a single post; if I tried I could probably come up with dozens, if not hundreds, of stories about tone-deaf moves by businesses and their management teams that have made the pandemic era even worse than it already was. Maybe I can start a regular feature on this topic, running every week to cover the most egregious example I can find in the previous seven days. For sheer idiocy, in terms of a move that does not work well under the current atmosphere, it may take a while to top the story of an employee who wrote to the CEO of Trader Joe’s asking for more rigorous anti-COVID procedures at work, and was promptly fired for his trouble, however…

I picked up the story from The Washington Post, but you can also find it on Twitter or any number of aggregation sites. A crew member working for Trader Joe’s at one of their New York locations wrote directly to the company’s CEO, explaining that more stringent measures were needed to protect the store crews, and that only the CEO had sufficient authority to impose them on the entire chain. Most of these were not terribly surprising, as workers everywhere have been asking for better air filtration, more time and supplies to disinfect the store interiors, and more conscientious enforcement of mask requirements. The only really innovative point in the letter was the request for a “three strikes” policy against customers who refuse to wear masks when inside the store…

It seems worth pointing out that employee recommended that the company accommodate customers who can’t wear masks due to medical conditions by using a curbside pick-up – a common measure taken by grocery and pharmacy companies, and one which Trader Joe’s already offers its customers. It also seems worth the mention that the company insists that it fired the employee in our story because of “the disrespect he showed toward our customers,” while telling the employee himself that the requests in his email and his temerity in emailing them indicated that he didn’t understand or practice the company’s “values,” whatever those might be…

What takes this over the line from poor management practice into complete idiocy is that the employee claims to have received stellar annual reviews, praising him for (among other things) his dedication to customer service and excellence in assisting customers – and the company has not disputed any of this as of this to date. Unless those reviews were all disinformation of some kind, it would appear that this employee is actually very respectful of the customers, and the company is actually taking offense at his request. In listing different causes in his termination letter and in their statement to the Post about this situation, effectively lying about the facts of the matter and slamming the employee, the company has not only managed to flush their own credibility, they have also sparked public outcry and calls for a boycott…

Now, I’m not going to suggest that the CEO of any company, let alone a national chain the size of Trader Joe’s, should have to consider and respond to every request received from one of their employees. I am suggesting that, if this story is true, then this matter was handled in possibly the worst fashion possible. It would have been much simpler for one of the CEO’s administrative assistants to reply with the company’s standard “thank you for your suggestion; we will look into it” message, and then ignore the whole thing. If anyone at corporate headquarters is actually mortally offended at the request that senior management “show up for” its employees by granting these requests, in return for the employees risking their safety by showing up for work every day despite the pandemic, they could always find some plausible excuse for firing this employee at some later point. Hopefully without triggering public outrage, giving rise to wrongful termination lawsuits, or making themselves look like a bunch of arrogant, thin-skinned, easily-offended idiots…

Alternately, I suppose, they could actually consider his requests…

Worse Than You Thought?

There was an interesting article on the New York Times site this week about a company called Mylan, which is probably best known for the scandal that erupted last year over alleged price gouging over the emergency epinephrine injector marketed under the trade name “EpiPen.” Readers who follow such things (assuming I have readers) may recall last summer, when there was a national outcry about this product, which contains less than $1 worth of the drug, but retails for $609 for a box of two. There were various accusations, claims and counter-claims, and the sort of official corporate statements that make people who don’t know any better wonder if command economies are really so bad (spoiler alert: they are). One might reasonably assume that the company would have done something about the situation by now…

Unfortunately, that assumption does not appear to be supported by the observable evidence. According to Times columnist Charles Duhigg, the company is still charging $609 for two name-brand EpiPens, or about $370 for the generic versions. The company insists that it isn’t doing anything wrong, and when challenged on this its CEO pointed out the on-line coupon and discount programs that can bring the consumer’s cost down below $100 per package. All of this appears to be correct, or at least Mr. Duhigg was able to confirm it when he looked up the offers in question. The real question seems to be why this situation is still going on a year after it made national headlines? Did the company restore its prices to the infuriating levels once the public outrage died down? Actually, it’s worse than that…

According to the linked article, the company has never actually lowered the prices on this product, although they have released the generic version and started up the discount and coupon programs over the past year. It’s probably also worth pointing out that despite the preposterous television commercial Mylan ran last year – it’s probably what drew enough attention to push the whole situation into the public consciousness in the first place – the EpiPen was never intended as anything other than an emergency measure to stop a life-threatening allergic reaction after everything else fails. Unless the user is extremely careless – or exceptionally unlucky – the only time they should need to buy a new EpiPen is when their current ones expire. But even considering that this isn’t a purchase anyone should have to make more than once every few years, there’s still the question of why the company hasn’t taken any real effort to lower the price. It turns out that this is also worse than you’d expect…

Put simply, all the company did was issue some ass-covering public relations measures and wait for the outrage to blow over – because that’s all it needed to do. In today’s Internet culture most people will have moved on to another scandal within a few days – which is as much a comment on the number of horrific news stories that come up these days as it is about the attention span of most people with access to multiple media. In such cases it usually helps if the outrage spreads to the shareholders of the company, or at least to the employees, but in this case both groups DID complain to senior management, only to be brushed off as part of the same stalling tactics. It’s unclear how much longer senior management and the Board of Directors a Mylan might have continued with these tactics if Federal regulators hadn’t announced that they were investigating the company for overcharging Medicaid by $1.27 billion for the aforementioned EpiPens…

Now it would appear that a group of pension fund managers, who control large blocks of Mylan stock, are planning to unseat most of the Mylan board for what their press release called “new lows in corporate stewardship.” The Times story also notes that Mylan’s chairman was paid $97 million in 2016, which was more than the salaries of the chief executives at Disney, GE and Wal-Mart combined. I can’t speak for anyone else, but I’d certainly be demanding my money back if I was one of the stockholders. And I hope somebody does, because while this may be a new low in terms of ethics and decency, unless the people who actually own these corporations (generally the stockholders) and the governments that give them money (that’s your government, folks) don’t start paying attention, and demanding better management practices, I’m reasonably sure that there will be something even worse coming along any time now…

The Trouble With Franchises

Actually, there are a lot of problems with a franchised business model, both from the franchisor’s standpoint and also from that of the franchisee. If you have purchased a franchise from someone then by definition you have given them a large sum of money in exchange for the right to open a branch office of their business and contribute to their bottom line. You may not ever see a dime of that money back; you may in fact go bankrupt even before you make your first franchise fee payment, but the company will still get its money. In some cases this might work out very well, such as the McDonald’s franchises, some of which have been estimated as being worth more than the franchise fee in marketing advantages alone. In other cases it might be a nightmare, as it was for the Krispy Kreme franchise holders who were basically used as a revenue source to enrich the personal fortunes of the CEO and his cronies in the early 2000s…

As bad as that is, things are frequently worse on the franchisor side. As attractive as it is to have people paying you to expand your business, the fact remains that every time you sell a franchise you are putting your company’s honor, reputation, and financial future into the hands of someone who you can’t control, who has no reason to like you or protect your company beyond the need to recover their investment. This can lead to improperly maintained locations that give your company an unwanted reputation for slovenly management and unsanitary conditions, public relations disasters that impact the performance of other franchisees miles or time-zones away, or human resources atrocities so absurd that they get you mocked by scruffy bloggers all over the globe…

I picked up the original story from the local television station in Houston, but in case you missed it, there are reports of a Popeye’s franchise demanding that the shift leader in one of their stores pay back the money that was stolen during an armed robbery because it was her fault the registers had enough money in them to be worth stealing. When the woman in question refused, saying that she’d already been robbed at gunpoint and couldn’t have afforded to replace the money anyway, she was fired. This would have been bad enough, but it turns out that the fired employee is a mother of three children who is currently pregnant with a fourth – and now facing unemployment in addition to her other problems…

Now, I don’t know enough about employment conditions in Houston to comment on whether firing someone because your company was robbed of less than $400 makes any financial sense. Typically, we assume that recruitment/replacement costs for supervisory personnel run between one-third and one-half of the first year’s salary, which in this case would mean somewhere between $5,000 and $10,000 for a supervisor in the $8 to $10 per hour range; possibly much more than that. Unless there are so many employed first-tier managers in the Houston area that a replacement can literally be found sitting in the restaurant itself, this was already an asinine decision on the part of the business. But once the story got out things became even worse for both the franchisee and the company…

There’s only one Popeye’s location within a fifty-mile radius of my office, and I already don’t go there because I would literally have to drive past dozens of other fast-food restaurants to get there. And I know that our local franchise has absolutely nothing to do with Z&H Foods in Houston, except for the fact that both companies purchased a franchise to make and sell fried chicken and biscuits. But even knowing that, I feel rather more negatively toward Popeye’s in general than I did before I read this story, and even more so since the franchisor in this story is refusing to comment and just dumping all responsibility for this fiasco on the local franchisee. Just imagine how much worse that could get if everyone who sees this story, on the air or on the Internet, has the same reaction…

Still want to go into a franchised business model? I can wait while you think it over…

It All Becomes Clear Now

Some time ago a video went around the Internet of a FedEx delivery driver throwing an expensive computer monitor over a seven-foot security gate, marking the package as “delivered,” and driving off. A few weeks later a second video showed us another FedEx driver stealing a package left by another service off of a doorstep while making a later delivery. This was rapidly followed by a blizzard of additional videos, some real and some staged, in which people in FedEx uniforms (real and home-made) did a variety of wince-inducing things that the company would probably like to believe never actually happen, before something else popped up and the world’s collective attention moved on. At the time, I was baffled by the minority of these videos that were eventually verified as real; it seemed fantastical that even a very large company could possibly experience that much bad behavior in that short a span of time. Little did I know that many of the people involved didn’t actually work for the company…

You can pick up the story from the Bloomberg site if it hasn’t been taken down, but apparently ever since FedEx bought Roadway Package Systems in 1998 and developed it into the FedEx Ground subsidiary, they’ve been classifying all of the delivery drivers as independent contractors, not employees. As a result, the company does not pay for overtime, health or retirement benefits, or even the drivers’ Social Security contributions; they actually deduct money from the drivers’ paychecks to cover the use of the delivery trucks and the cost of the uniforms that these personnel are required to wear. According to some of the lawsuits that have popped up about this, the company is, in fact, taking as much as sixty percent of the “wages” paid to these personnel, turning what would otherwise be good jobs into ones that barely pay…

It remains to be seen how the various legal actions will turn out; U.S. Circuit Courts in Indiana and D.C. have sided with the company, but the U.S. Ninth Circuit Court of Appeals in San Francisco ruled that the FedEx Ground drivers are employees (and entitled to all of the same rights as any other employee) in a decision handed down just this past August. Now the Kansas State Supreme Court has ruled in favor of the drivers (as of October 3^rd), and the National Labor Relations Board (NLRB) has rejected FedEx Ground’s claims, finding that the drivers are in fact employees. This issue is still a long way from being resolved, and so far the company is still fighting, but the momentum seems to be with the drivers. As a former management consultant and analyst, I can’t help wondering if anyone has pointed out to the company that this whole policy was idiotic in the first place…

FedEx Ground drivers are the company’s front line customer service personnel; in many cases they are the only human contact customers will have with the firm. If those employees are conscientious, helpful, and treat both the customer and their packages well, it reflects well on the company and makes people more inclined to use the service again. If those employees are grumpy, surly, disgruntled, resentful, or angry with their employer, they are likely to do things like throwing packages of delicate electronics over fences, leaving packages in garbage cans, or even (in extreme cases) leaving the shipments at any random address along their route rather than delivering them. And while it would facile to blame the company for all of the bad behavior of its personnel, this system is creating the perception that the company does not care about its delivery personnel, and will cheerfully rip them off for more than half of what they are allegedly making in the first place…

None of this excuses the bad behavior (and outright criminal offenses) being committed by the “independent contractor” driver personnel, of course. But it does offer some explanation for those nagging questions about how an otherwise highly successful company ends up with that many miserable excuses for employees…

It Finally Happened

For some years now I’ve been trying to deal with a reputation for not liking children, which I feel is completely undeserved. Part of it stems from the fact that I was single for all of those years, while the majority of my friends married, had children, and succumbed (to one extent or another) into the obsession the late George Carlin called “The Cult of the Child” – the belief that the world revolves around children in general, and their particular child most of all. I can understand why parents feel that way – and I imagine that doing so is probably an evolutionary survival trait. But like anything else, it causes problems if taken to extremes, as in the case of parents who can’t understand why the rest of us don’t enjoy listening to their child shrieking as much as they do. So, for the record, and hopefully for the last time, I have no issue whatsoever with children; I just don’t like badly behaved ones. It makes me want to slap their parents…

In the case of one young boy from New York, it would appear that law enforcement has already done some of that for me. You can pick up the story from the local CBS affiliate station if you’d like, but what they are reporting is that a woman in East Garden City, New York, has been arrested for leaving her seven-year-old son unattended at the Lego store in their local mall while she went shopping. After 90 minutes or so the child became frightened, and the store manager called security, who in turn called the police. Persons familiar with the case are quoted as saying that the mother thought there were store employees who looked after children playing in the store, despite the fact that Lego stores do not offer that service, there is no designated play area, no release forms to sign, no one to take responsibility for the children, or indeed, any reason to believe that anyone would be watching out for a child left alone…

Now, I’m fairly sure that some people reading this blog (assuming anyone reads this blog) are going to have trouble with my comparing a parent abandoning a child in order to go shopping at the mall to parents who follow their children around constantly but refuse to discipline them for any reason. After all, one of these behaviors is considered neglect, while the other is considered over-protective or obsessive, depending on your point of view. But in addition to spending decades as a childless bachelor, I’ve also spent a number of years now as a college instructor, and I am telling you that neither of these parental behaviors are doing the children any favors. Although, to be fair, anybody who has had to deal with teenagers, college students, or entry-level employees in the last decade or so could tell you the same thing…

As usual, I’m going to leave the moralizing about this topic to people who are better qualified, and just point out that both ends of the spectrum are problematic from a business standpoint. Nobody wants to deal with entitled employees who believe that they should be given lavish rewards for doing exactly what they please – because that’s what their parents always did. At the same time, no one wants to deal with parents using our place of business as a free daycare center because they can’t be bothered to take care of their own children. And since we can’t influence how people raise their children, we will have to work on this from the other end – by establishing clear and explicit performance standards, writing company policies that require accountability as well as performance, teaching business classes that encourage discipline and teamwork, and rewarding employees who live up to those standards…

And when absolutely necessary, calling the police and having the courage to risk legal action, criticism from Monday-morning quarterbacks, and reprimand from higher management ranks when we report some idiot for leaving innocent children in dangerous situations…

The Other Shoe

In yesterday’s post, I was talking about the fallout from this week’s Hobby Lobby decision, and why the whole policy that resulted in the lawsuit was a bad idea from a Management standpoint. For many years now I have maintained that any decision or policy that is ultimately against the best interests of the employees is not in the best interests of the company, at least in the long term. In a larger sense, I’m generally against policy decisions that negatively impact any of the corporation’s stakeholders unless there is some overwhelmingly important reason for doing so. Actions which are bad for the community, state or country in which the company operates in general are rarely good for the firm itself in the long run, if only in the sense of having customers who can buy your products and of not being constantly besieged by regulatory bodies, law enforcement agencies, consumer advocates, environmental groups, community leaders, civil rights lawyers, or angry mobs with torches and pitchforks. But as bad as all of that it, the Hobby Lobby decision may actually have created something even worse…

Traditionally, one of the reasons people form corporations is to protect themselves from certain types of legal liability. Incorporating the company creates the legal fiction that the company is an entity separate from the people who own it or manage it. The corporation can own property, conduct business transactions, borrow money and pay taxes; it can also be fined or sued – but the people who own it can’t be. As one of the stockholders, you can’t be personally held responsible for the actions of the corporation – which seems only reasonable, since you are only one of the hundreds or thousands of people who own it, and you didn’t personally make any of its questionable decisions. If a company in which you own shares declares bankruptcy and is sued by its creditors, the court may be able to seize the company’s assets, but they can’t take your personal funds. You can see how important this could be in the case of major product liability suits or matters of criminal malfeasance, to take only the two most obvious examples…

This legal fiction is generally called the Corporate Veil, and it is often considered one of the most important kinds of protection offered by incorporation. The problem is that the Veil is only a legal fiction; if the owners of the company do anything that even implies that the corporation is not a completely independent entity it is possible for the courts to ignore that fiction, or “pierce the Corporate Veil,” and hold the owners directly responsible for anything the company does. Common violations would include not keeping accurate records, not paying dividends to the shareholders, or intermingling the company’s assets – using corporate funds to pay for personal expenses, for example. It isn’t usually possible to pierce the Veil because the owners are clearly just using the company to further their own interests or agenda, because it is usually very difficult for hundreds or thousands of owners to agree on a personal agenda in the first place but it can happen – when a single individual or family owns the entire company, for example…

In the case of Hobby Lobby, it’s much too easy to argue that the owners of the company – who happen to be members of a single family – are using the company and its compensation packages to further their own political and/or religious agenda (to the extent that there is any difference, these days). As noted in yesterday’s post, their anti-birth control policy is not in the long-term best interests of the employees, the company or the owners themselves, but the opportunity to challenge the Affordable Care Act under a religious exemption does further both the political and religious agenda of the owners. If the court – any particular court hearing a case against the company – decides that they have broken the rules and may therefore not have the protection of the Veil, damages assessed by that court may be directed against the owners of the company. That would include any of the gender-discrimination or religious-discrimination cases starting up over this situation, by the way…

Now, I’m not going to pretend that this was the first thing that came to my mind when I heard about the Supreme Court decision last week. It wasn’t until I read the news story here and the “Friend of the Court” brief it references here that I realized that just how badly this could end for the company’s owners – and that nearly four dozen law professors from top universities thought so, too. So however much we may want to mock the owners of Hobby Lobby for the financial and public relations consequences of their actions, it would appear that the legal aspects of the situation are even worse – and that any first-year Law student could have told them how utterly stupid and ultimately self-destructive their policies were…

I Believe I Said That…

I picked up a link today that led me to a story about Wal-Mart executives calling the Company’s current stocking problem a “$3 billion opportunity.” I call it to your attention because this may be the most amazing piece of spin I have ever seen, and certainly the best I have seen in years. Anyone reading this quote (or the associated headlines) would most likely get the impression that senior management has identified new methods or policies regarding inventory control, inbound logistics, and internal distribution that will increase sales by as much as $3 billion each year (if not more)! Unfortunately, the truth is the executives running the Company have finally realized that if customers can’t find the product they want to purchase because there isn’t any on the shelves, not only will they not purchase it, but they will (eventually) get mad enough to take their business elsewhere. This might still be cheerful news, except the reason for Wal-Mart’s chronic out-of-stock conditions is the lack of personnel available to load more products onto the shelves – and that is the direct result of senior management attempting to squeeze more money out of each store by refusing to hire enough workers or employ them full-time…

You can pick up the original story on Bloomberg News if you want to; it has a lot of backup financial data and some really interesting quotes from some of the managers involved, but the basic story is clear enough. Over the last five years Wal-Mart has opened about 650 new stores, while at the same time their overall number of employees has dropped by about 20,000. Or, to look at it another way, during this period the total number of stores has increased by about 17% but the total number of people working in the stores has dropped by about 2% - a net loss of staffing that approaches one-sixth of the total hours available to keep a store running. As a result, there aren’t enough people to keep the shelves filled, resulting in an estimated $3 billion in lost sales – unless those numbers are net, rather than gross, in which case the company is actually losing $3 billion a year in revenue…

Now, as bad as that is, it’s still only part of the problem. Almost as serious as a lack of personnel is the issue of your available workers performing badly, and one of the key factors that can lower performance is stress – such as that of being yelled at by irate customers who can’t find the products they want, or of having to cover the responsibilities of multiple workers because management won’t hire enough people to get the job done, or not having the proper training to complete tasks because there’s no time to train people because of the artificially inflated work load, and so on. In fact, anything you do that makes working conditions worse will lower morale, making your existing employees less effective, and making your problems even worse. All of your best people will leave to find better jobs (or at least less awful ones) as soon as possible, resulting in positions that automatically select for the worst possible candidate, and the cycle will continue until you have no one available who can actually do the job, which will in turn result in unions forming, billions of dollars of sales being lost, or frequently both…

Readers of this blog (assuming I have readers) will recall that for years now I have been writing that any human resources policy that degrades working conditions will have a direct negative impact on revenue and profitability through lower employee performance, greater turnover, and a corresponding decline in the quality of the work force. I have never written about what would happen if a company’s hiring policies were so absurd that they did not hire enough people to keep their shelves filled because I could not imagine anyone stupid enough to do such a thing. But apparently somebody was, and it would seem that their idiotic staffing policies have gotten bad enough to where they are costing the company more money each year than 3,000 average people would earn in a lifetime…

I can’t speak for any of Wal-Mart’s stockholders, of course, but if the senior management of a company I owned shares in were trying to pass off a $3 billion blunder as an “opportunity” I might just be tempted to go to that year’s General Meeting and start demanding some answers – or hire a lawyer and start demanding that someone be held accountable for this total incompetence. I’ll keep you posted on this story while we wait to see what management does about the situation – and whether or not it helps…

You Pays Your Money…

I was reading an article on the Business Insider website this week and it struck me that how you viewed the events the author was talking about would depend very much on your point of view. If you don’t want to hit the link, they’re talking about a CEO who turned down an offer to buy out his company – an Internet start-up video-sharing service – for $100 million USD, only to then see his company’s business taper off, its market value drop, and then get fired by his board. The author is looking at this from a position sympathetic to the CEO, discussing how upsetting these events are to all entrepreneurial business people (all Business Insiders in general, one assumes), and how awful it must be for the CEO in the story to have had all of this happen to him. When I read the story, my immediate reaction was that the CEO had a $100 million offer in hand, gambled on being able to get $365 million instead, and lost, taking most of the stockholders’ equity out in a flash…

Now, one could legitimately point out that a lot of new Internet services have sold for a lot more than the $100 million offer over the past few years – notably the photo-sharing service called Instagram, which is essentially the still-picture equivalent of the video-sharing service in our story. It would certainly be foolish to sell an asset worth in excess of $360 million for only $100 million, and you would probably expect a CEO who low-balled the sale of his company to be punished in some fashion once the news got out. People still talk about the inventors of the original DOS system selling out to Bill Gates for what was actually a quite reasonable price at the time, and just imagine what people would be saying about someone who decided to take a low-ball offer for Google or Facebook before they really took off…

On the other side of the issue, we can also point out – as the Board of Directors in our story seem to have done – that passing up a buyout offer for $100 million is still depriving the stockholders of the company of $100 million, and that taking this offer before the company’s business took its sudden decline and its price plummeted as a result would have been a better strategy. It’s not clear from the story if the CEO had any reason to believe that these things would happen, but he had to have known it was possible for the company’s overnight success to slow down or stall out, and he must also have known that gambling on the value of his company rising and losing would not sit well with the company’s owners. It’s also not clear from the story what ownership position (if any) the CEO had in the company, or if Agency Theory problems even come into this…

One of the key issues in Agency Theory is that while a stockholder can own stock in all of the companies he or she wants to, the CEO can (usually) only be the Chief Executive of one of them. This makes the executive less likely to take risks with the company (such as selling it and hoping you got a good price), but he or she also needs to remember that acting against the interests of the stockholders (such as refusing to see the company for $100 million just before its site traffic drops by 83%) will eventually get you fired – unless your gambles pay off…

What happened to the CEO in this story may be unfortunate, but the truth is he was gambling with other people’s money, and those people became upset with him when he lost most of it. He could have chosen to be more conservative, to counter-offer with a high sale price, or any number of other strategies, but he was in no real position to complain when the results came out. As my late mother was fond of observing: “You pays your money and you takes your chances…”

Caught in the Middle

Earlier this week I ran across the story of a Best Buy store that had posted a sign by their front door stating up front that the price listed on their website may not be the same one offered in the store, and that if you want they will help you place the order online for delivery to your home. Needless to say, a lot of people (and bloggers) immediately started ragging on Best Buy for this remarkable bit of electronic ineptitude, saying that if you’re going to have one price for online purchases (and in-store pickups) you ought to be able to coordinate that price with the brick-and-mortar stores and have the same prices on the shelf tag. Which is true enough, I suppose, but rather misses the point behind a simple paper sign stuck to the front window – which is clearly local management’s effort to protect itself from being caught between corporate management and outraged customers…

You can pick up the story from The Consumerist if you want to; they should also have links to various news stories about this even by now, as well as a story of the offending sign. It’s worth noting that Best Buy is a regular target of consumer analysts and advocates nationwide, not just the nice folks on The Consumerist; it’s also worth pointing out that Best Buy has ended up on the wrong side of both civil and criminal actions for pricing fraud, and in one case was caught setting up an in-store intranet site that looked exactly like the company’s real web site, only with the higher prices as indicated on the shelves. But while all of these various crimes are real – and while Best Buy has consistently failed to behave in the manner we would expect from a national retail chain – the store in this particular story isn’t attempting to take advantage of anyone, much less defraud their customers. Local management has obviously gotten tired of explaining that the prices they are told to charge and the ones offered online won’t always be the same, and is acting to cut off people who will demand the lower price at check-out even though the store can’t offer it…

The unfortunate truth is that a company as large as Best Buy could easily have multiple departments in multiple locations (or even countries) setting prices for different stores in different regions, as well as the ones on the web site. It would be more professional (and rather more efficient) for the company to hire someone to coordinate all of those prices and make them at least somewhat consistent, but this isn’t a legal requirement; as long as the company complies with local laws about pricing policy (e.g. no “bait and switch” games, or the equivalent) they can charge whatever they want. You, as the consumer, don’t have to pay those prices, of course, but the people working at the various stores will still have to deal with all of the whining, carping, and complaining from the people who came in and didn’t find the price they wanted to pay – as well as all of the people who think they can get a special discount by claiming to have seen a much lower price on the web site and demanding that the store honor the price they just made up…

After a few weeks of that, it’s hardly surprising that local management got tired of having to explain things and just put a sign in the window. The lesson to take away here, I think, is that corporate management can do whatever it wants, but if they make things difficult for the people on the spot (in this case, the store’s management team) they can expect their local representatives to take matters into their own hands. If this sort of thing is going to be a problem for the company, then you need to pay more attention to what is going on in your local operations – before you find your company’s name being mocked by thousands of scruffy bloggers for their own amusement…

How Stuff Works: Board of Directors

I’ve been keeping an eye on the expanding compensation scandal at the Blue Cross/Blue Shield of Massachusetts, and it struck me that many of the people commenting on the story have no idea what a Board of Directors is or what it is supposed to do – and the reporters covering the story aren’t helping. Then it occurred to me that the reporters may not know either – most of my students don’t know until I explain it to them, and they’re all graduating seniors in a top business school, not political/public opinion journalists. So I thought we would continue with our occasional series on How Stuff Works, and look at what the Board at Blue Cross was supposed to do – and why they may not have done it…

In theory, any corporation (public or private) is nothing more than a group of people who have pooled their money in order to start a company. You or I don’t have the cash to start a new car company, for example, but if we get a hundred million or so of our friends together and we each put in $100, that’s $10 billion of capitalization, enough to start a new GM, for example. The problem we run into is that none of us has the time to run the company – we all have to have jobs to make the $100, and even if we didn’t, most of the people chipping in the money don’t have the experience or training to run an automobile company in the first place. So we hire a CEO to run the company for us. The problem there is that we can’t really supervise the CEO, despite the fact that he or she actually does work for us; we don’t have the time or the expertise. So what we do is hire a team of people who know about running big manufacturing companies, tell them what we want the company to accomplish, and have them tell the CEO what we want him or her to do. This team of experts is called a Board of Directors…

Right off the bat, you can see how there would be problems with this. First off, the Directors are not going to work for free, so we’re going to have to pay them. Keeping track of all of the factors involved in running a large company takes a lot of time (try it if you don’t believe me), so we’re going to have to pay them to be on the board – and experts at that level will not work for cheap. Then there’s the board independence issue – depending on who we get, the Directors may have more loyalty to the CEO than they do to the stockholders, or they may run their own companies and have reciprocal understandings with our CEO. Even if they don’t have these problems, the Directors will almost certainly have their own public relations issues, and they may have political or personal reasons for voting a specific way on certain issues…

In the case of the Blue Cross board members, the Boston Herald online is raising cane because several of the Directors who voted to give their (failed) outgoing CEO an $11 million severance package are also crusaders against rising healthcare costs – at least, publically. Certainly the Chamber of Commerce President and Union President involved have a vested interest in appearing pro-business and anti-cost. Commenters on the site (and people in Boston generally) appear to be outraged by the idea that these supposed reformers were paid large salaries (&70,000 to $80,000 per year), and made no effort to screw the outgoing CEO out of money his contract promised him. The problem is that while this may be hypocritical, it isn’t even unusual, let alone improper…

Board members may only meet four times each year, but all of them are assumed to spend weeks reading up on the issues before those meetings. The board salaries cited may seem excessive – especially when, as the article notes, they’re higher than the average person’s salary – but they’re probably not out of line for the qualifications of the people holding those posts. As to trying to deny the outgoing CEO his contractual bonus funds, the Board might have been able to win the court case – but they would also have had to risk losing it and costing the corporation three times (or perhaps more) in judgments. The suggestion that the Directors should be willing to do those jobs for free because the organization is a non-profit is equally silly; a non-profit isn’t necessarily a charity, and even if it is, the people who work for it still need to make a living. The kind of people who will serve on a board for no compensation probably aren’t the same people who know how to run a large (and complicated) organization like Blue Cross in the first place, and the kind of people who have that expertise will not work for free…

The bottom line in this case is that the Directors haven’t done anything wrong. If the people who own the company – in this case, probably the people of Massachusetts – don’t approve of the Board’s actions, they can fire the Directors and get new ones. They can also vote any of the Directors who hold public office out, and demand the resignation of anyone who holds a private position. But claiming that there has been wrongdoing in this case just proves that the people doing the complaining don’t understand How Things Work…

Unwise Choices

One of my favorite truisms about management is the oft-repeated “Never second-guess the person on the ground” – meaning, don’t tell someone who was facing a crisis what they should have done; they were there and you weren’t, and while your choice might have been a better one, none of us will ever know for sure. What people seem to forget about that statement is that it refers to choices made during a crisis; split-second decisions where all the manager had to go on was judgment, or intelligence as guided by experience. If you read the news these days it’s quite easy to find decisions made in the comfort of a boardroom or executive suite days or years before the crisis actually came that show a lack of judgment so complete it’s difficult to even think of sufficiently snarky things to write about them. The recent gas pipeline explosions in San Bruno, California, are a good case in point…

As reported online by CNN here , Pacific Gas & Electric (PG&E) had planned to replace the section of pipeline that caused the explosion back in 2009, and had received $5 million in rate increases to pay for the work, but then diverted it to “higher priority work.” Instead, in 2009 they requested another $5 million in rate increases, and then awarded roughly the same amount of money to six top executives as bonuses. The watchdog agency quoted in the online article also claims that PG&E spent $62 million over their budget in 2009 for “management incentives” and an additional $60 million in re-doing gas leak surveys that had been botched the previous year. Probably the most amazing part of the case is that the pipeline in question had been built in 1948 and never replaced, and the PG&E had identified it as being one of their top 100 most likely to fail according to their own records…

Now, I could go off on a rant about the ethics of not maintaining gas pipelines in densely populated areas, gouging your customers for rate increases in order to furnish a handful of your top executives with million-dollar bonuses, or providing incentives to a management team that apparently can’t even cope with the idea that exploding pipelines that kill both your customers and your public image are bad – but there’s not much point; none of those topics really require elaboration, let alone explanation. Let me instead call to your attention the line at the end of the article, where PG&E has already agreed to set up a $100 million fund to re-build parts of San Bruno affected by the blast. There has been no word yet, but with at least 7 wrongful death suits to follow, the total cost of this fiasco will probably be two or three times that much…

Obviously, the people running PG&E knew there was a risk; just as obviously, they decided that paying large bonuses was worth running that risk. Losing that gamble has already cost them twenty times what they scooped out in bonus money, and could potentially end up being a forty-to-one or sixty-to-one loss. If any Federal, State or local prosecutor can find evidence of actual criminal negligence, there could also be trials for manslaughter or even murder (under the Depraved Indifference statute), and it would be surprising if there aren’t stockholder lawsuits (assuming PG&E has stockholders) to recover ALL of the management incentives and bonuses during the period when these asinine decisions were made. Which leads us to the obvious question: why in the world would you bet the assets, reputation and public image of your company, if not your own reputation and possible future, on something that could come back to bite you sixty-fold if you are wrong? Or, it that isn’t snarky enough, why would you take a chance with this much potential to end badly in a way that almost literally screams “Stupid Management Tricks” for a net of less than a million dollars each?

Of course, it’s possible that the people who received the wayward $5 million are not the same ones who made the choice to allocate those funds in such a manner, but it hardly matters now. The only remaining questions for the company are “What on Earth were you thinking?” And, almost as important, “What other bright ideas have you acted on lately?”

A Celebration – Continued

Yesterday we began celebrating some of the truly stupid business moves of 2009, as brought to you by Fortune Magazine and CNN. It seems a shame to kick all of these people while they’re down, but on the other hand there are some actions so asinine, and so completely to the contrary of the public good, that they bear repeating. And I don’t know where you’d find a better example of that than South Carolina’s Governor, Mark Sanford …

By now you probably already know Sanford from his South American holiday and the associated massive hypocrisy, but had that story not broken he’d probably still have gone down in infamy as one of a few Republican governors who attempted to refuse the Obama Administration’s stimulus money. In fact, Sanford intended to demonstrate his commitment to his conservative fiscal beliefs by refusing $700 million in Federal aid, thus depriving the state with the second-highest unemployment in the country of any of the public works projects you could fund with that money, as well as the jobs that would be associated with them. Several other Republican governors, notably Sarah Palin of Alaska, also attempted to reject the Federal assistance, but in Sanford’s case the South Caroline Supreme Court ruled against the Governor and ordered him to accept the money. The combination was a political black eye that would likely have finished Sanford’s career if the whole infidelity matter hadn’t wiped it out of the public eye…

I’ve already noted that attempting to use the Hoover Administration’s approach to an economic crisis (running around the Oval Office making little shrieking noises) is part of what did in the Republicans in last year’s Presidential elections, and we can only hope that any other governors (Republican OR Democrat) who try it meet a similar fate. Even if such a move was economically correct (which is clearly dubious, at best) this is a public relations blunder so completely inept that if it wasn’t for Willie Walsh, CEO of British Airways, I wouldn’t even have anything to compare it to. For the record, Mr. Walsh is the executive who asked all of his personnel to work for 40 days this year without pay in order to save the company from bankruptcy, saying that he would himself not take a salary for July (and presumably 9 other days this year). The gesture fell flat, however, since Mr. Walsh received a 6% pay raise for this year and will still make in excess of $1 million even if he does take 40 unpaid days (and made $1.2 million last year); the general feeling among the airline employees is that he can afford it…

But I think the top honors have to go to the folks at AIG, who insisted on granting $165 million in annual bonuses to the people who had tanked their company and forced the Federal Government to bail them out for over $150 billion – on the grounds of needing to retain those people. As I noted in an earlier post, even if all of those people really were critical to running the company (and pulling it out of the mess it was in), and despite the fact that all of the bonuses together didn’t amount to even 0.2% of the Federal bailout money, this was a PR disaster that made AIG eclipse Halliburton as the most hated organization in America; a feat I would have said was impossible just a year earlier. Moreover, since financial services are a relationship-based business, I fail to see how AIG will ever recover from annoying all of its customers to this extent…

I’d call these posts high comedy, and suggest that we all needed a good laugh, except for two rather troubling facts. First, most of the people responsible for these idiot plays are still in place, and likely to continue planning strategy for these same organizations. And second, it’s only July. The year’s not over yet…

A Celebration

Every year around this time, Fortune Magazine comes out with a review of the stupidest business moves of the year to date – what they refer to as a mid-year report. Some of their choices are a bit snarky; some of them will make you want to point out that the issues they are mocking really are not as cut-and-dried as they’re making things sound, and some are trivia you probably didn’t care about anyway, but I’d have to say that the majority of them are funny. And this year’s crop includes some good ones…

You can access the article in slideshow format here if you want to, or at least until the CNN site takes it down. I’m just going to touch on a few of the highlights, because there are some things that I don’t honestly think could ever be mocked enough. Like the Segway/General Motors collaboration project, for example. Called a PUMA, the resulting vehicle looks a lot like a wider Segway scooter, only with seats for two people and a windshield/canopy arrangement. Early reviewers immediately started calling it the “electric rickshaw” and mocking it for its limited range (35 miles on a charge), while calmer observers questioned if this was really a good place for GM to be expending resources while on the very brink of bankruptcy. It’s worth noting that there may not be anything wrong with the concept – in fact, the new product may work very well – but the timing was still off…

Then there’s John Thain, the former CEO of Merrill Lynch. During the buyout arrangements with Bank of America, it came to light that Thain had just completed a $1.2 million redecoration of his office in New York. Not really the best thing the CEO of a publically held company to be doing at the best of times (the stockholders have a natural tendency to want to see that money put into dividends or earnings, not perks for the President), but completely asinine for the head of a company facing bankruptcy and liquidation. Given that even a simpleton should have known that the details would eventually leak out, it’s even harder to explain why Mr. Thain thought that spending $87,000 on an area rug or $35,000 for a specialty toilet for his office was a good idea…

I also enjoyed the story about the New York Yankee’s $2,500 seat offering. For those of you who don’t know, cheap seats in the average baseball stadium are generally between $6 and $15, with good seats going from $25 to $80, and individual seats in a luxury skybox running from $100 to $300. There are exceptions, of course, but in Los Angeles (for example) seats in the exclusive Dugout Club section (which includes access to the premium food service venue of the same name) are only $500, and the most expensive regular sears are only about $120. Field level seats in the new Yankee Stadium (just the seats; nothing particularly exclusive) were $2,500, with a season ticket price of $200,000. Yes, that’s roughly the equivalent of buying an entire luxury box (in Phoenix, for example, a box has 25 seats at $100 each); and again, yes, if you wanted a pair of seats for the season in that section it would cost you $400,000. Enough to buy a house in much of America, and enough to buy a really nice house in the Lansing area…

Needless to say, perhaps, $200,000 season tickets are even harder to sell than $2,500 single-game tickets in the middle of an economic crisis, and the seats went unsold. Of course, the Yankees eventually got tired of seeing all of the empty seats on television, and cut the price for those seats by 50% - which still makes them more than twice as expensive as the best seats in the house in L.A. So far, that hasn’t helped, but at least it’s better than some of the other reactions to the financial crisis covered by this same article…

(To be continued!)

Specialty Business, Specialty Problems

I could never understand what the big deal was with the Hooters chain. Possibly this stems from the fact that I was raised in Los Angeles and took my undergraduate degree in Santa Barbara, two cities in which one can observe women dressed far more revealingly than any Hooters waitress merely by going to the beach on a sunny day. And while I grasp the concept that many women find the infamous Hooters uniform offensive, the great American custom of voting with one’s feet seems to take care of this situation, in the sense that these women do not patronize Hooters restaurants, and the people (male and female) who do are not those who find the uniform offensive…

In fact, Hooters is hardly the only company that selects its personnel in accordance with a specific image; one can find similar (if less blatant) examples throughout the service and retail sectors. Many jobs actually have much more extensive physical requirements than those placed on the Hooters wait staff, who are, after all, only required to maintain a “glamorous appearance,” whatever that means. Specialty job functions may place requirements on the height, weight, girth, age, or physical abilities of the employees selected for those jobs, and no one seems to mind. Unfortunately, specialty businesses that require the services of specialty personnel experience a series of problems that will never occur in a mainstream firm…

There is a case being reported in The Des Moines Register this week that illustrates the point rather well. It seems that a waitress at the Hooters in Davenport was unable to report for duty after a domestic violence incident that left her temporarily unable to present a “glamorous appearance,” whatever that means. The waitress wasn’t fired or even laid off; she was just told that she wouldn’t be put back on the work schedule until her injuries healed. Unfortunately, the waitress was unable to just go without pay for several weeks, and had to file for unemployment – which left the company in a really unpleasant situation…

If they refused to pony up their share of the unemployment benefits the waitress would receive, they ran the risk of being lambasted in the media, mocked by bloggers and Fark readers, and sued for any number of discriminatory offenses, real and imagined. But if they paid the claim to someone who had not, actually been fired they ran a very real risk of having to pay those same benefits to anyone who quit their jobs, or being lambasted and sued for quite real discriminatory practices (e.g. providing benefits to attractive women, but not other employees who might have chosen to quit for other reasons)…

Now, I know some of you are saying “It’s their own fault; they chose to have this idiotic dress code for their servers, they can live with the consequences!” And, in fact, you’re quite right. If Hooters hired people based entirely upon their abilities as servers and dressed them in, say, white long-sleeved shirts and black trousers, the waitress in our story could have been back on the job as soon as she was well enough to stand up. It is only because they have chosen to occupy a specialized business niche and provide a specialized version of casual dining with specialty personnel that they are experiencing this monetary expense and public relations nightmare. The point here is that, sooner or later, every specialty business is going to face a similar or identical problem…

Maybe a business that needs very tall people will have to deal with injuries sustained on the overhead fans; maybe a business that requires very small people will be sued by someone who was pulled off a roof while trying to pull something up on a rope; maybe a business that requires people with exceptional senses of smell will be sued for using the wrong brand of disinfectant in the restrooms. Unless your workforce is an exact cross-section of the people who live in your community, your business will have this same problem, albeit in a less cosmetic sense, sooner or later…

How are you going to deal with it?

Not Invented Here

How many times has this happened to you? You're working on an absolute peach of an idea - something that will enrich the company, improve stockholder equity, solve all of those nagging problems that have beset your work group for years, and improve the quality of life enjoyed by all mankind. You don't expect a reward, let alone the promotion and raise you richly deserve, for making this happen; you're doing it because someone has to, because it's an idea worth having; because you take your fiduciary responsibility to the stockholders seriously, and because you take pride in your work. Even if your superiors steal all of the credit for your idea, it was still worth doing -- and of course, doing well.

Instead, your boss and his colleagues (or his boss and her colleagues) take one look at it and reject it without comment. Or, at least, without anything resembling INTELLIGENT comment. "That's not how we do things around here," they might say, if you've been with the company for a shorter time than they have. "It will take too long or cost too much," they could declare, if they don't feel like reading your proposal (after all, they control the money and the work schedules, so they get to decide) or thinking about it any longer. "This will never work," the might decree, if the idea has real merit and there's no easy way for them to steal the credit. "I don't like this," they might tell you, if you've demonstrated that your idea saves money, takes less time than existing methods, and works perfectly.

Chances are, you've just run into one of the worst things that can possibly befall an original idea: Not Invented Here Syndrome. Sometimes this means literally, in cases where the company has taken on a bunker mentality, and anything their own management team didn't dream up is seen as a threat to their way of life. Other times it indicates a manager who has come to view any subordinate with brain activity as a threat, who is maintaining control over the work group by attacking all ideas that he or she didn't personally invent and then blaming the employees for a lack of initiative and creativity. And sometimes it indicates that the person you are dealing with has fallen deeply, madly in love with their own idea or their own concept of how the business should be, and they can't bear to change or part with any of it.

I don't have any clever, magic-bullet ideas for how to beat this syndrome; it's one of the worst kinds of management failure, and may actually indicate that your manager is incompetent and/or in need of immediate replacement. You can prove the worth and value of an idea, and demonstrate that the concept will work, and still be met with comments like "You're right. I know you're right. But I'm not going to do it anyway." Trust me; I've seen it happen. If you have the power/influence with higher management, you may have to arrange an intervention by higher authority. If not, you might have to take whatever action you feel is appropriate to a supervisor who has gone mad and is going to destroy the company around you -- even if that means handing in your resignation and fleeing the scene.

To my fellow managers, I can only say that before you dismiss any idea, you should ask some logical questions. Will this idea work? If it does, will it make money or produce some other positive value for the company? What are its Net Present Value (NPV) and its Internal Rate of Return (IRR), and are they appropriate to the company, the current situation, and the characteristics of the idea? Can you personally gain by becoming the sponsor of this project and the mentor of the bright young person who came up with it? Is it, in fact, an artifact of how you nurture sharp young minds and the original ideas they produce? Or, at least, can you get YOUR boss to believe that it is? And, of course, if your subordinates fear bringing you new ideas to the point where they never do, how will you ever know when they ARE working on something that will enable them to take over your job?

It's worth thinking about...

Global Economy

Regular readers of these rantings (and I'm pretty sure there are some) have heard me going on about the Global Economy, and how no matter how isolationist you might happen to be, you still ignore Globalism at your own risk. Or, as I have said at least twice in this space, "It doesn't really matter if you believe in the Global Economy or not; the Global Economy believes in you!" Well, today in the news online, there was a story that proves that point once and for all.

BBC News is reporting that a factory mass-producing those "Free Tibet" flags you keep seeing all over the world on the news has been uncovered operating in Southern China. That's right, folks; the same people who are going to bad-movie parody lengths to squash the "Free Tibet" movement and anyone who might support it are also making money off of the movement. In fact, since doing business in China automatically includes making "gifts" to local officials to get things to happen, it is a virtual certainty that actual members of the Chinese government have been receiving money in exchange for making this happen.

Now, from a business standpoint, this seems only logical. Since crushing a popular rebellion is dirty, expensive work, it would only make sense to make as much money off the by-products of the situation as you can. In fact, it seems a shame that the U.S. Government has never made anything off the sales of all of the "Che" t-shirts and posters that stupid people who don't actually know anything about Ernesto “Che” Guevara buy, considering the amount of money our government has spent fighting everything Guevara stood for (and trying to prevent or counter the revolutions he was trying to start). It’s an irony that Guevara himself would have considered grotesque, although probably no more so than the fall of Soviet Communism and the rise of a free-market economy in China…

But whether or not this strategy has any utility from a government/revolutionary/counter-revolutionary standpoint is irrelevant. From a leadership standpoint, or simply from the standpoint of trying not to look like a clueless jerk, it would probably be a good idea to avoid manufacturing the banners of protest that the enemies of your government are waving...

Why does he tell us this? I hear some of you asking. You know you'd never accidentally do anything that would cause the Department of Homeland Security to pay YOU a visit, right? You know the complete details of every part of every product that your company manufactures, and there's nothing there that could possibly give aid or comfort to an enemy, make you look like a drooling idiot, or destroy your company simply because you didn't read what it was you were going to be manufacturing before you signed the contract, right?

Right?

Sure, I'll wait…

Standardization

There was another story today sermonizing about the destruction of small local bookstores by Borders and Barnes & Noble, with help from Costco and Wal-Mart. This is hardly a new story; it's been everything from a repeating MSN Money page to a movie with Tom Hanks and Meg Ryan. What's interesting is that recent iterations of the tale are discussing how the two "big-box" bookstores are running out of smaller fish to feed on, and have started battling each other instead. It seems that their over-emphasis on homogeny is interfering with their ability to differentiate themselves from each other, and their focus on the so-called "blockbuster" books (splashy, high-profile releases) means that not only do they lack unique products to sell, but Wal-Mart and Costco can sell all of their key products at even lower prices than the giant booksellers do.

What I find amazing about these woes is that any frequent customer could have told them this was going to happen -- and I include in that the frequent customers who are 5 years old and just learning how to read. If you are not a frequent customer, just go by any Borders store at random - and you can select any store at random, that's just the problem. Now go around the corner or down the street and check out a Barnes & Noble. You will almost certainly find exactly the same books for sale, at exactly the same prices. The accessories, impulse buy items, home furnishings and whatnot will be different, but not the core of their business, the books (and CDs, DVDs and so on). There is no real reason to prefer one chain over the other, or any given location of either chain over another.

Even the size of the store is irrelevant. Try going to two Borders stores of different sizes (or two B&N locations; makes no difference). You will still find the same titles. The larger store may have more copies, or more "remaindered" books to sell, but even that is unusual; you are far more likely to find exactly the same merchandise distributed over a larger area. They still offer more selection than a Wal-Mart, for example, but trying to find anything other than mainstream, blockbuster titles is usually a futile undertaking. If you want anything specialized, not even obscure but just off the mainstream path a short way, you will need to have it special ordered -- or visit Amazon.com, the other reason the "big-box" bookstores are in trouble.

In fairness, this same problem occurs in almost every large chain store -- a drug store that has twice the square footage is no more (or less) likely to carry the specific product you want than any other unit in the same chain, for example. This is because purchasing and inventory control are generally handled by Corporate or Regional headquarters personnel, who are doing all of the buying (and most of the store display design work) for several hundred stores at a time. This allows the big chains to get their deep discounts for buying in bulk, but it also means that every unit in the chain will have to carry the same merchandise, give or take a few linear feet of shelving.

This is not to suggest that your former independent neighborhood bookstore was any better about this, or that a resurrected version of it would be able to complete with these "big-box" giants and win. The fact is that with the rise of the electronic media fewer and fewer people read books for recreation each year, and the emphasis on mainstream and "blockbuster" publishing means that the people who do read are mostly reading the same things. The number of people who are going to want to walk in off the street and purchase an obscure title in a specialty merchandise category was never very large, and it too has been eroded by the current trends in retailing and literacy. Still, it does make you wonder if the remaining bookstores might get a new lease on life.

Or if e-books will be the product that finally does them all in…

A Hypothetical Question in Ethics

For this week’s ethics post, I would like to invite everyone out there to join me in a hypothetical question:

Imagine that you are the owner of a highly visible business. A report is published in the newspapers, and immediately picked up by every media channel in the world, in which a witness with extremely marginal credibility implicates one of your most productive employees as the long-term user of an illegal substance. Further, let us imagine that the witness offers no proof, no hard evidence of any kind, and there is no way for anyone to corroborate his accusation of your employee, who in turn categorically denies all of the charges. There is no way this evidence would ever be presented in a court of law; no prosecutor in the world would touch such a case for fear of being laughed out of court. But because both your business and the employee being impugned have relatively high profiles, the media scrutiny of both you and your employee is intense, and uninformed people all over the world are convinced of his guilt and your complicity.

Including at least some of your customers.

What are you going to do? Before you answer that question, you may want to review your reaction to the Mitchell Report, released one month ago today. Because, as near as I can tell, almost every one of the Major League Baseball franchise owners is dealing with that exact question right now – or will be soon…

Now, as a long-term baseball fan, I must tell you that I have no love for the owners. Even the most balanced accounts of the sport during the mid 20th Century make it painfully clear that the owners brought the Player’s Union and all of the attendant problems of the players as represented workers down on themselves, through dirty dealings that would make a Teamster blush. And I have no great sympathy for most of the players; it is difficult to feel sorry for a bunch of grown men who are being paid tens of millions of dollars to do something that half of the people in America would gladly do for just a living wage – if we were capable of doing so in the first place. Both groups should have realized decades ago that if they didn’t work out some means of policing the industry themselves that the public would demand action be taken, and that the government would eventually attempt to do so.

For the players themselves, the best course of action seems clear: they don’t have to prove their innocence, the government has to prove their guilt, so the best thing for them to do is get clean, stay clean, and say as little as possible. Documenting every medical treatment they’ve ever had would be sensible, and I’m sure they’re already working on doing just that. None of the “evidence” presented so far is any real threat to anyone, and if a real case does pop up somewhere, they all have the money to hire top legal representation and defend themselves. But what if you were one of the owners; how would you approach this storm? For the purposes of this question, we will assume that you do not have certain evidence of your employee’s guilt or innocence (in which case your legal obligations would be clear). Do you have an obligation to support your employee and maintain his innocence? Even though he probably can’t do as much for you without risking public and/or legal exposure? Or do you just remain aloof, refuse to discuss the matter, and let the pieces fall where they will?

It’s worth thinking about…